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Great resource booms usually end abruptly, catching almost everybody by
surprise.

The rhythm is as old as mankind. It is poignantly described Nobel laureate
Halldór Laxness through the life of an Icelandic sheep farmer a hundred
years ago in Independent People, harrowing because his ruin is so utterly
human.

Studies by the World Bank covering two centuries of data sketch a pattern of
10-year supercycles, followed by a slide for the next 20 years or so as
excess investment leads to a flood of supply. The long bear market can be
cruel for those hanging onto to resource stocks, convinced that the rebound
must be nigh.

Mark Ryder, Australian investment chief for UBS (NYSEArca: DJCI - news) , says we are reaching just
such an inflexion point as China’s manic construction phase gives way to
more sedate growth, and Europe (Chicago Options: ^REURUSD - news) , America, and Japan (EUREX: FMJP.EX - news) take their fiscal
medicine. "The commodity super cycle’s end is at hand. The scene is set for
a momentum shift," he said.

This view is daily dinner talk in Australia, a country that lives off iron ore
and coal sales to China - and described contentiously by Dylan Grice from
Societe Generale (Paris: FR0000130809 - news) as "a credit bubble built on a commodity market built on an
even bigger Chinese credit bubble".

It is starting to take hold as the new consensus in the City where funds are
keeping a close eye on the mining trio of BHP Biliton, Rio Tinto (Berlin: CRA1.BE - news) , and
Brazil’s Vale. All three are battening down the hatches as hopes fade that
this year’s 23pc fall in iron ore prices will soon reverse. Rio is cutting
$5bn in spending by 2014. Vale is expected to pare back its $40bn investment
plans next week.

But it is a report by Citigroup’s Edward Morse that has most rattled resource.
He claims that America’s shale gas revolution -- which has cut US natural
gas prices by 70pc -- is a taste of what will happen across the gamut of
commodities as vast investment comes on stream. The inference is that
parking money in "long-only" resource index funds -- worth $250bn -- has
become a mug’s game.

It is the classic pincer movement of supply and demand, with Chinese imports
of iron, copper, coal, and oil cooling at just the wrong moment. "It is now
clear the commodity super-cycle is over. The overall slowing and the
restructuring of the Chinese growth model should mark a watershed in global
commodity markets. For many industrial metals, China, in fact, was
responsible for all of net global demand growth after 1995," he said.

Mr Morse says China’s growth will slow from 10.5pc to 5.5pc by 2020 - Credit
Suisse thinks it could be as low as 4pc, and the US Conference Board 3.7pc -
but the crucial twist is that appetite for resources will wane as the
Politburo calls time on history’s greatest building boom in history and opts
instead for a modern, sleek, consumer and service-driven economy.

This then is the argument of the bears, one that many of us will have to
grapple with over coming months. If they are right, it will churn up the
global investment landscape, rippling through the currency markets. Much of
the London Stock Exchange (LSE: LSE.L - news) is a resource play, either directly or through
Russian and Kazakh companies and such-like that feed off commodity
economies. But are they right?

It is not entirely clear to me why a such a China would be energy frugal. The
country is to add 125m cars over the next five years, half the entire US
fleet, which will have to be parked in multi-story blocks or below ground.
Petrol at the pump costs 66p a litre, so it is not exactly rationed. (Saudi
Arabia is worse of course: it costs 5p for diesel).

In any case, the Reserve Bank of Australia -- keenly alert to the China’s
story -- disputes the basic premise. It argues in a report that construction
will not peak in absolute terms for another five years as 20m rural migrants
pour into the cities each year. The pace will not slow much until the
urbanisation rate reaches 70pc in 2030.

The RBA said China’s growth will become more "steel-intense" -- not less -- as
building shifts to high-rise blocks and urban sophistication. "Steel used in
residential construction will peak around 2024, at a level that is 30 per
cent higher than in 2011," it said.

I have made two trips this year to cities deep in the interior and it is
hardly a secret that Chengdu, Chongqing, Xi’an, Changsha, and Kunming and
others are attempting to replicate the East Coast booms with their own
metropolitan extravaganzas over the next decade.

Chengdu’s planning chief told me the Hukuo feudal system that keep peasants
stuck in their villages is being dismantled in Sichuan, opening they way for
a fresh wave of migration. She (SNP: ^SHEY - news) expects her city to grow from 14m to 20m by
2020.

Nor is it clear that the Communist Party is yet ready to wean the country off
state credit, top-down planning, and chronic over-investment, an addictive
model for Maoist patronage.

China’s Development Research Council knows that the catch-up model launched by
Deng Xiaoping in 1978 is no longer fit for purpose as China moves up the
technology ladder.

Yet the Party’s 10-year power transition last month seems to have been a
victory for hardliners. Key (NYSE: KEY - news) reformers were shut out of the seven-man
Standing Committee. The North-Korea trained Zhang Dejiang has tightened his
grip, a boon to the state-owned behemoths. It looks as if the Politburo may
try to keep the infrastructure blitz going for another cycle, extending it
to the 800m or so people of the hinterlands.

This is fatal for China. Such a course risks ensnaring the country in the
"middle income trap" over the long-run. But in the short-run -- say another
five-year cycle -- it could kindle a fresh burst of uber-growth, with demand
cascading through the Asian tigers and the commodity complex.

Standing back, you might argue that commodities have held up remarkably well
this year given that Europe has crashed back into double-dip slump, that the
US slowed to stall-speed over the early summer, and that China itself has
been through a quasi-recession with falling electricity use and rail
freight, and a collapse in steel output.

For Brent crude to trade at $111 a barrel in such a bleak world suggests that
Asia’s industrial revolutions have pushed oil prices to a structurally
higher plateau. Energy (NYSEArca: JJE - news) costs may well punch higher once the next cycle of
growth is under way.

No doubt the Malthusian narrative - peak this, peak that - at the top of the
commodity boom four years ago was overblown. The US energy revival has shown
how quickly human ingenuity can sweep away assumptions.

Yet all the nagging worries about resource depletion are still there. New
supplies of oil are mostly deep in the ocean beneath of layers of salt, or
in Russia’s arctic High North, or in Canadian tar sands at a production cost
of $90.

The US National Academy of Sciences says that 26pc of all copper that ever
existed in the earth’s crust has already been lost in usable form for
mankind, and to my knowledge this claim has not been refuted. Platinum
supplies are even tighter.

The shift towards an animal-protein diet in China and across Asia continues to
gobble up supply of grains as feed, in competition with biofuels. United
Nations data shows that the world is losing 12m hectares of arable land each
year (Britain’s total is 17m) due to urban sprawl and degradation, yet there
are an extra 73m mouths to feed each year.

For two centuries, commodity prices fell ever lower in real terms with the
nadir of each cycle, in what is known as the Singer-Prebisch process. The
terms of trade seemed forever rigged agaisnt the primary producers.

There is a some evidence that this is finally going into reverse as scarcity
takes its revenge. If so, we may find that the supercycle is still in rude
good health next year as China cranks up construction again, and America
turns the corner.

And never, ever ignore the global money supply. The key gauge -- real
six-month M1 -- touched bottom at 1.5pc in May. It jumped to 3.7pc in
September and seems on the same track for October. The world’s kindling wood
is crackling again. Can commodities really stay cold?

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